Financial Technologies Tumbles as Founder Arrested in Probe

May 08, 2014 8:37 am ET

(Updates with order on Shah’s custody in third paragraph.)

May 8 (Bloomberg) -- Financial Technologies (India) Ltd. slumped by its trading limit in Mumbai after Chairman Jignesh Shah was arrested by the police as part of an investigation into the biggest payment default in India’s commodity market.

The shares fell 5 percent to 276.30 rupees, the lowest close since Feb. 13. Multi Commodity Exchange of India Ltd., in which Financial Technologies owns 26 percent stake, declined 6.7 percent to 497.15 rupees, the lowest close since April 1.

Shah, 47, was arrested for “custodial interrogation” to learn more about the payment default, Mumbai Police Additional Commissioner Raj Vardhan Sinha said yesterday. A Mumbai court ordered a seven-day police custody for Shah today, Bloomberg TV India reported citing a court order. The arrest may delay Financial Technologies’ plan to divest its stake in MCX, according to K.R. Choksey Shares & Securities Pvt.

“If Shah is granted bail, the situation may not get adverse,” Deven Choksey, managing director of the Mumbai-based brokerage, said by phone. “If he is denied bail and is sent to judicial custody, then the sale can probably take longer.”

Financial Technologies got nine bids for its stake in MCX, it said April 12. An audit report by PricewaterhouseCoopers LLP on MCX, which said some deals with Financial Technologies appeared to benefit the latter, has stalled the sale process, according to Choksey. “The crux now lies in resolving queries that PWC has raised,” he said.

Shareholding Rules

Financial Technologies will also need to review its sale plans after the market regulator this week capped the maximum shareholding of a financial institution or a bourse at 15 percent in a commodity exchange and that of an individual or a company at 5 percent. Exchanges including MCX have until June 23 to comply with the new rules.

The National Spot Exchange Ltd., which Shah founded, was ordered by the government in July to halt trading, and it is the subject of the probe. NSEL failed to settle about 56 billion rupees ($935 million) in dues to investors, according to the commodity market regulator.

“The arrest was long overdue,” Arun Dalmia, secretary of NSEL Investors Forum, said yesterday. “Now, the process of recovering the money will definitely speed up.” The group was formed by investors who lost money when the exchange defaulted.

The now-defunct NSEL broke rules by permitting the sale of goods traders didn’t keep in its warehouses, according to regulators. The turmoil began with the government seeking details on NSEL’s settlement cycle on July 14, and deepened with the suspension of most contracts on the NSEL on July 31.

Assets Seizure

The Forward Markets Commission, the commodity regulator, in December declared Shah and former MCX Managing Directors Joseph Massey and Shreekant Javalgekar as ineligible to hold any post in the bourse. While MCX held no stake in NSEL, it was controlled by Financial Technologies, which also owns exchanges in Bahrain, Botswana and Dubai. Javalgekar was also arrested yesterday.

Police probing the crisis at NSEL seized properties and shares worth $487 million from exchange officials and defaulters in December, which may be used to clear dues to investors. The investors have so far only received about 5 percent of the 56 billion rupees, said Dalmia of the NSEL Investors Forum.

--With assistance from Abhishek Shanker in Mumbai.